Transcript Latest Findings in NSW Council Sustainability Hallmark

Latest Findings in NSW
Council Sustainability
Hallmark Local Government Conference, 29th July 2008
© Professor Percy Allan AM
Review Today Pty Ltd
Agenda

2006 Local Government Inquiry

2007 Council Sustainability Report

2008 Council Sustainability Report

What should councils do?

Council sustainability reviews
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2006 Local Government Inquiry
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
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In 2005/06 an inquiry into NSW local
government sustainability was undertaken
by a three person panel that was chaired
by Professor Allan who also directed its
research.
The Inquiry was sponsored by the LGSA,
but was undertaken completely
independently of that organisation.
The LGI’s findings on councils’ financial
sustainability were as follows.......
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2006 Local Govt. Inquiry Findings


The balance sheets of most councils were
exceptionally strong, displaying very low
levels of indebtedness to other sectors of the
economy.
On average, the net financial liability of
councils was little more than 2% of its total
assets. Only a handful of councils exceeded
10%. This compared with 25% for the NSW
Government and over 50% for PPP
infrastructure operators.
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2006 Local Govt. Inquiry Findings

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By contrast, the operating statement of
most councils was heavily in deficit.
Excluding commercial utilities (e.g. water
and sewerage) councils on average ran an
operating deficit of almost 5% of their total
own-source revenues. Over 20% ran
operating deficits in excess of 20%.
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2006 Local Govt. Inquiry Findings
40%
Council Operating Deficits and Surpluses *
20%
0%
-20%
-40%
-60%
* Expressed as a proportion of their total own source revenues
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2006 Local Govt. Inquiry Findings
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
Councils’ operating deficits are largely funded
by running a surplus on capital account rather
than resorting to borrowings.
This means capital contributions, capital
grants and proceeds of asset sales are mainly
used to prop up operating costs rather than
undertake capital renewals and
enhancements.
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2006 Local Govt. Inquiry Findings


The annual deficiency in capital spending for
all council purposes was of the order of
$500m a year. This had resulted in an
infrastructure backlog of over $6.3 billion.
This backlog would grow by a further $14.6
billion over the next 15 years if the renewals
gap was not closed. This figure did not take
account of any future infrastructure
enhancements as a result of population
growth, increasing social mobility and better
building standards.
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2006 Local Govt. Inquiry Findings


On a no-policy changes basis, council per
capita revenues and expenses were
expected to grow in real terms by 8% and
9% respectively over the next decade. This
would aggravate councils’ existing operating
deficits.
Additional functions and pressures could
result in council real per capita expenditure
growth being double what it would be
without any policy changes.
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2006 Local Govt. Inquiry Findings

Under these circumstances councils’ overall
expenditure growth could only be matched
by their revenues if all water utilities
achieved full cost recovery (so they could
pay commercial rates of dividend) and all
councils lifted their rates, charges and fees
to those of the top 25% of councils.
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2006 Local Govt. Inquiry Findings


However, even these radical revenue
measures would not be sufficient to eliminate
most councils’ operating deficits. Indeed for
two thirds of councils, deficits would still
average 8% of their own source revenues.
For one in four councils the long-term outlook
was particularly bleak. Without substantial
rate increases and/or disruptive expenditure
cuts, they were financially unsustainable.
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2007 Council Sustainability Report
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In 2007 FiscalStar was commissioned by
Review Today to update the findings of the
LGI.
This study proved controversial because
while the LGSA favoured researching the
sustainability of local government as a
whole it objected to the results being
disclosed for individual councils.
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2007 Council Sustainability Report
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Review Today believes that the challenges
of any public service that is not financially
sustainable will only attract public (and
hence government) attention when the
implications of inaction are understood by
each community and citizen that uses
those services.
This requires analysing and highlighting
the challenges at the point of delivery of
the service be it a council, school, hospital
or police station.
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2007 Council Sustainability Report
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This is why the Local Government
Inquiry’s findings and recommendations
were by and large not heeded by the
state and federal governments.
Ordinary citizens could not fathom how
councils financial and infrastructure crisis
would affect them personally. As a result
local government was not an issue in
voters minds in the 2007 state and
federal elections.
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2007 Council Sustainability Report
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Localising the analysis and reporting of
public sector performance is the next big
reform in Australian public sector
management.
Witness the Rudd Government’s
insistence on performance league tables
for individual hospitals as is done in
Britain.
Report cards on individual schools, TAFE
colleges, police stations, courts and other
vital public service delivery points could
follow.
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2008 Council Sustainability Report
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In 2008 Dexia, a French Bank that supports
research into local government best
practices around the world, sponsored
Review Today to commission FiscalStar to
undertake a new survey of local council
sustainability using the latest data available
from councils and a more sophisticated
analytical methodology.
Other than sponsoring the survey, Dexia
had no input to the methodology or
analysis which was undertaken solely by
FiscalStar.
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2008 Council Sustainability Report
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Review Today’s role was to coordinate and
quality control the report’s presentation
and its public communication.
FiscalStar is an Adelaide based practice that
specialises solely in rating local council
financial sustainability in Australia and New
Zealand.
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2008 Council Sustainability Report
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FiscalStar surveyed the 100 largest local
councils in NSW using both their published
information and answers to a
questionnaire.
Only 3 councils Botany Bay, Gwydir and
Wellington) don’t disclose sufficient
financial and infrastructure data on their
websites for FiscalStar to make an
assessment of their financial sustainability.
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2008 Council Sustainability Report
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The main finding of the 2008 FiscalStar
report is that 35 of the 100 largest
councils in NSW need to increase their
rates, fees and charges by at least 80%
over the next ten years or severely cut
their services in order to regain financial
sustainability.
Another 19 councils will also need to take
drastic action because their financial
sustainability is marginal.
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2008 Council Sustainability Report
The Financial Sustainability of Existing Financial and
Infrastructure Policies, Largest 100 NSW Councils, 2006/07
Sustainability Rating
Number of Councils
Sustainable
43
Vulnerable
19
Unsustainable
35
Not assessed*
3
100
* 3 of the largest 100 NSW councils (Botany Bay,
Gwydir and Wellington) have published neither
their 2005/06 nor their 2006/07 statutory
financial reports in full on their websites
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2008 Council Sustainability Report
40%
OD ratio
U
30%
U
V
20%
S
10%
0%
0%
-10%
-20%
50%
100%
150%
200%
250%
BL ratio
300%
S
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2008 Council Sustainability Report
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The unsustainable group included a large
number of fast growing regional coastal
and outer-metropolitan councils.
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2008 Council Sustainability Report
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11 of the 18 regional coastal urban councils
were unsustainable. Only 3 were
sustainable.
10 of the 22 outer-metropolitan councils
were unsustainable and another 4
vulnerable.
By contrast a majority of inner metropolitan
councils and regional rural councils were
sustainable.
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2008 Council Sustainability Report
Sustainable Vulnerable
Unsustainable
InnerMetropolitan
11
3
5
OuterMetropolitan
10
4
8
Regional Coastal
Urban
3
4
11
Regional Inland
Urban
6
5
6
Regional Rural
13
3
5
Total
43
19
35
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2008 Council Sustainability Report
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The heart of the problem is that most
councils have a huge backlog of
infrastructure (roads, stormwater drains,
buildings, etc) that has passed its used by
dates and needs renewal, not just patching
to be safe, sound and sightly.
For the 97 councils surveyed, the
(unweighted) average backlog ratio is 90%,
which contrasts starkly with their
(unweighted) average debt ratio of 25%.
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2008 Council Sustainability Report
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Only 12 councils have an infrastructure
backlog that is less than 10% of their annual
operating revenues.
46 councils have a backlog of between 50%
and 200% and another 10 councils have a
backlog exceeding 200%.
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2008 Council Sustainability Report
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FiscalStar found that the total
infrastructure backlog for the 97 councils
(excluding W&S) was $4.3 billion.
This would suggest that the total for all
152 councils in NSW (excluding W&S) in
June 2007 was around $4.8 billion, which
is about 10% less than the LGI’s estimate
of $5.3 billion for June 2005.
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2008 Council Sustainability Report
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Adding a council’s infrastructure backlog to
its outstanding debt gives a measure of its
total ‘broad liabilities’.
FiscalStar found that the ‘broad liabilities’
of all councils that are unsustainable
averages 187% of their total annual
operating revenue.
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2008 Council Sustainability Report
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For ‘vulnerable’ councils the broad liabilities
ratio average is 95%. To be sustainable a
council’s combined debt and backlog should
not exceed around 60%.
Even ‘sustainable’ councils need to be
vigilant because their average is 55%
suggesting that many are living on the
edge of sustainability.
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2008 Council Sustainability Report
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The ‘unsustainable’ and ‘vulnerable’
councils also have difficulties on other
fronts.
Most importantly their operating deficits
when expressed as a proportion of their
own source revenues average 9%.
By contrast ‘sustainable’ councils have
operating surplus ratios averaging around
10%.
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2008 Council Sustainability Report
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FiscalStar found other weaknesses of many
councils are:
 a heavy reliance on tenuous grants
from other governments
 little or no spare cash to meet
emergencies and special needs
 expenses growing well in excess of
underlying costs, and
 insufficient capital works spending to
renew ageing infrastructure.
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2008 Council Sustainability Report
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Of the 22 net changes in ratings since last
year, 13 were due to councils
substantially changing their data
(especially on infrastructure backlog) and
9 were due to improvements in
FiscalStar’s analytical methodology.
The latter reflected councils having
favourable financial characteristics (other
than lower deficits and liabilities) that
were not previously considered.
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2008 Council Sustainability Report
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To be sustainable a council should be able
to achieve two financial goals within 10
years without increasing rates, fees and
charges or cutting services to an extent
that would disrupt a community both
socially and economically.
Sustainability should not be confused with
solvency. Nor un-sustainability with
insolvency.
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2008 Council Sustainability Report
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Sustainability means the ability of a council
to continue with its existing revenue and
spending policies without causing severe
social and economic disruption to the
community.
A council may have unsustainable policies,
but still be solvent because like all
governments it can always tax and levy
itself out of bankruptcy (notwithstanding
rate pegging).
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2008 Council Sustainability Report
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A council should be mindful of two
primary financial goals:


Achieving a budget surplus, so that
future taxpayers are not left with an
excessive share of the costs of capital
works, and
Containing the size of broad liabilities
(i.e. debt plus the infrastructure backlog)
so that debt charges remain affordable
and infrastructure remains safe and
sound.
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2008 Council Sustainability Report

Fiscal/Star in line with the LGI
believes that responsible financial
benchmarks for a council’s are:
A
minimum operating surplus ratio of
2.5%, and
 A maximum broad liabilities ratio
(reflecting long-term debt plus any
infrastructure backlog) of 60%.
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2008 Council Sustainability Report

These financial sustainability parameters
can be expressed on a chart with the
operating deficit (OD) ratio represented by
the vertical axis and the broad liabilities
(BL) ratio shown along the horizontal axis.

Note that an operating surplus (OS) ratio is
denoted by a negative operating deficit (OD)
ratio.
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2008 Council Sustainability Report
40%
OD ratio
U
30%
V
20%
S
10%
BL ratio
0%
0%
50%
100%
150%
200%
250%
300%
-10%
OS ratio
-20%
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2008 Council Sustainability Report
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
The green, amber and red zones
represent current council policy
‘sustainability’, ‘vulnerability’ and ‘unsustainability’ respectively.
The shape of any councils zones is
determined by its degree of financial
discretion (i.e. freedom); a concept
explained later.
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2008 Council Sustainability Report
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The next chart shows the path that one
particular council which is in the
‘unsustainable’ red zone must take in order
to achieve a 2.5% operating surplus ratio
and a 60% broad liabilities ratio which lie
safely within the ‘sustainable’ green zone.
Note that in this example the unsustainable council presently has an OD
ratio of 15% and a BL ratio of 120%.
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2008 Council Sustainability Report
40%
OD ratio
U
30%
20%
10%
actual values:
OD ratio = 15%
BL ratio = 120%
V
m
=m
present imbalances
S
BL ratio
0%
0%
-10%
50% x
100%
150%
200%
250%
300%
target values:
OD ratio = -2½%
BL ratio = 60%
-20%
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2008 Council Sustainability Report
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
To achieve sustainability the particular
council in the last chart will clearly have to
increase its rates, fees and charges and /
or cut its services by a substantial amount.
This would be disruptive to its community,
which is why its fiscal situation is
designated as red, not green.
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2008 Council Sustainability Report
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Councils in the green zone have
sustainable revenue and spending policies
as they won’t need to increase their rates,
fees and charges by more than one and
two-thirds the annual CPI increase over
the next ten years to achieve the two
financial sustainability benchmarks.
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2008 Council Sustainability Report
40%
OD
U
30%
V
2 times
inflation line
20%
S
10%
V
S
U
0%
0%
-10%
50%
100%
150%
200%
250%
BL
300%
1⅔ times
inflation line
-20%
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2008 Council Sustainability Report

Councils in the red zone have
unsustainable revenue and spending
policies since they will need to increase
their rates, fees and charges by more
than double the annual inflation rate over
the next ten years to achieve the financial
sustainability targets.
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2008 Council Sustainability Report
40%
OD
U
30%
V
2 times
inflation line
20%
S
10%
V
S
U
0%
0%
-10%
50%
100%
150%
200%
250%
BL
300%
1⅔ times
inflation line
-20%
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2008 Council Sustainability Report

Those councils in the amber zone fall
between having sustainable and
unsustainable revenue and spending
policies so have been designated as
vulnerable.
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2008 Council Sustainability Report
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
FiscalStar considers that increases in
council rates, fees and charges below one
and two thirds the average annual
inflation rate over ten years is
‘sustainable’ because it shouldn’t cause
severe disruption socially and
economically.
Note that this amounts to an increase in
rates, fees and charges of under 5.8%
per annum assuming annual inflation of
3%. Over ten years this would be less
than 64% to meet the financial goalposts.
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2008 Council Sustainability Report
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
By contrast FiscalStar assumes that an
increase in rates, fees and charges double
the annual inflation rate over ten years
would be socially and economically
disruptive and as such ‘unsustainable’.
Note that that councils that fall into the
unsustainable (red) zone will need to
raise their rates, fees and charges by at
least 6.1% per annum assuming annual
inflation of 3%. This is more than 80%
over ten years to achieve the financial
sustainability goalposts.
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2008 Council Sustainability Report
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The councils assessed as un-sustainable
would need to increase their rates, fees
and charges by between 80% and 200%
over the next 10 years to achieve
financial health.
Those rated vulnerable would need hikes
in their revenue levies by 60% to 80%
over the same period.
By comparison the sustainable councils
only face increases of between 30% and
40% between now and 2018.
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2008 Council Sustainability Report
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The 2007 FiscalStar report relied
principally on a council’s deficit and
liabilities to rate its sustainability.
As a result a single fixed set of goalposts
was used for each councils as shown in
the next chart.
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2008 Council Sustainability Report
40%
OD ratio
U
30%
V
20%
S
10%
BL ratio
0%
0%
50%
100%
150%
200%
250%
300%
-10%
S
V
U
-20%
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2008 Council Sustainability Report
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
A criticism was that this basic sustainability
test was too simplistic since it overlooked
other financial characteristics that
impacted on a council’s sustainability.
In 2008 FiscalStar has amended its
methodology to ensure that each councils
goalposts is specially customised to reflect
other characteristics that might enhance or
impede its financial discretion or freedom.
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2008 Council Sustainability Report

Financial freedom is the ability of a council
to control its financial destiny because:

It is not overly dependent on government grants

It has strong (unrestricted) cash balances

It increases its expenses at less than inflation

It renews infrastructure when its due

It values assets at fair-value, not historic-cost.
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2008 Council Sustainability Report
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Councils exhibiting more financial freedom
have less onerous criteria charts (i.e. green
and amber zones) than councils that have
less financial discretion.
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2008 Council Sustainability Report

This is an example of a criteria chart for a
council with a strong financial discretion.
40%
OD ratio
U
30%
V
20%
S
10%
m
m
BL ratio
0%
0%
50%
100%
150%
200%
250%
300%
-10%
-20%
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2008 Council Sustainability Report

This is an example of a criteria chart for a
council with weak financial discretion.
40%
OD ratio
U
30%
V
20%
S
10%
m
m
BL ratio
0%
0%
50%
100%
150%
200%
250%
300%
-10%
-20%
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2008 Council Sustainability Report
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So its possible for two councils to have
the same operating deficit and broad
liabilities ratios but to be rated very
differently on sustainability because one
has a high degree of financial discretion
(e.g. large unrestricted cash reserves to
meet an emergency) whereas the other
does not.
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2008 Council Sustainability Report

The 2008 methodology differs from the
2007 one (which was also used by the SA,
NSW, WA and Tasmanian local govt.
inquiries) in that it takes account of a
council’s financial discretion (or freedom).
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What should councils do?

How should a
council react to
the FiscalStar
report?
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What should councils do?

A council’s first reaction to the latest results
should not be complacency (if its
sustainable) or denial (if its un-sustainable
or vulnerable), but rather:


Is my published data (especially
infrastructure backlog data) accurate?
If not, what can I do to improve its
reliability?
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What should councils do?


If the data is reasonably accurate a
council with either an ‘unsustainable’ or
‘vulnerable’ rating should take its rating
seriously rather than shoot the
messenger (i.e. FiscalStar).
FiscalStar has unmatched experience in
Australia and New Zealand at assessing
the comparative financial performance/
health of governments at the national,
state/regional and local levels.
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What should councils do?

63
Councils that are
either not
sustainable and / or
sure about the
reliability of their
published data
should do their own
sustainability
analyses.
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What should councils do?
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If this shows they
have a problem they
should develop a
business cases to
persuade both their
communities and the
Minister for LG what
needs to be done.
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What should councils do?

The NSW DLG has
proposed that,
each council
prepare a 10 year
community
strategic plan
(CSP) to be revised
and rolled forward
every 4 years;
within 18 months
after each council
election.
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What should councils do?


Supporting the CSP
will be long term
financial, asset
management,
service delivery
and funding
strategies).
The CSP process is
a tool for councils
to document their
proposed path to
sustainability.
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What should councils do?
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It would also be
foolhardy for
councils to ignore
the FiscaStar
sustainability ratings
in the hope that the
Commonwealth and
State will eventually
come to their
rescue.
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Council Sustainability Review

What does a
council
sustainability
review involve?
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Council Sustainability Review
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A sustainability review
develops a long-term
financial strategy to
enable a Council to
achieve the best
balance between its
obligations to:

Service provision

Infrastructure provision

Ratepayer affordability &

Financial viability.
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Council Sustainability Review
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A council
sustainability
review addresses
key questions such
as……
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Council Sustainability Review
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Will Council’s existing
policies meet the
community’s
infrastructure and
service needs?
If not, what can be
done to fix
infrastructure and
provide necessary
services.
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Council Sustainability Review
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
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Are such alternative
spending scenarios
affordable within prudent
fiscal limits?
If not, what could be
done to boost revenue,
achieve efficiencies, or
reorder spending
priorities to make Council
sustainable?
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Council Sustainability Review
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73
Review Today has
undertaken in-depth
financial sustainability
reviews for the
following councils:
 Newcastle,
 Albury,
 Wollongong and
 Great Lakes
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Latest Findings in NSW
Council Sustainability
The End
Contact details:
 www.reviewtoday.com.au
 [email protected]
02 9810 6346
 [email protected]
m.au
04 1912 2255
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